Seasoned investors who were once wary of unproven concepts are now beginning to take a chance on new ideas. Here David Roberts of Olswang gives his top tips for getting the funding required to get a new concept off the ground.
Now that London has established itself as a global food capital and is playing the role of a concept incubator for literally hundreds of new concepts, we are starting to see the emergence of investors who are willing to do the unthinkable – backing an unproven concept.
Not long ago, the rule of the thumb was that it was investment suicide to back a concept that had fewer than three units up and running and less than a 24-month trading history. That conventional wisdom still applies and there are plenty of the key early stage investment players who still subscribe to such a theory.
Having said that, there are a number of examples of new concepts popping up, which are receiving backing from seasoned investors, high net worth individuals and industry players and, therefore, this article contains my top 10 tips to starting from scratch to help you get the funding required.
1. Prove the concept on the street
Get a stall at Street Feast or Brick Lane markets and start trading and building your fan base. Nothing makes an investor more confident than being able to point at growing revenue figures and a healthy margin. So get down, get dirty and get on to the street.
2. Get a site
Once you have established your cuisine, start thinking about evolving into a bricks and mortar offering. It’s far easier to raise money when you have actually won your first site. If you are lucky enough to get a new lease (and thus avoided paying a premium to get your first site) that’s even better but unless, and until, you have locked down a site, it will be impossible for an investor to distinguish you from the 15 other business plans they are considering.
3. Cornerstone investor
Ironically, if you ask someone for money, they will likely say no. However, if you tell someone you are almost fully funded, you’ll be surprised how many investors will say: “Can you squeeze me in?” Thus, your chances of success will improve tenfold if you can point to a cornerstone backer of your concept who has already climbed aboard.
4. Understand your exit strategy
When raising funds, be very clear on what the investors’ and your exit strategy will be. Are you building a one-off restaurant to become a long-term independent player in the London market for instance or a low-cost, limited-service concept that will be perfect to roll out across the country? The costs, returns and funding needs of these differing models are hugely different and need to be articulated. Investors are more likely to be interested in a concept that has ‘legs’ and I would therefore suggest it’s easier to raise cash for a roll-out concept as opposed to a one-off vanity restaurant.
5. Business model
Build a business model that follows some basic fundamental restaurant principle. Your annual rent should no be more than 9% of your projected turnover. If you do not structure your menu to have a 70% margin on food, again, you will not get the profit needed to attract investors. Finally, be sure your model is prudent in terms of (i) how often you will turn the restaurant every day, (ii) the average spend of your customer and (iii) allow six to 12 months before you
project strong trading and leave a substantial cash buffer.
6. Settle on a concept
Think of a concept that has appeal – don’t think of a concept that you like. There are hundreds of failed restaurants that were created by owners cooking their favourite dishes. Settle upon a concept that the public will embrace and a price point that marries up with your business model.
7. EIS/SEIS
Be sure to seek advance clearance from HMRC to ensure that your investors can benefit from the tax breaks that have helped to drive the restaurant growth in the UK, namely SEIS and EIS. I do not know of a single restaurant start-up in recent years that has not sought to qualify for these tax reliefs. It’s a must.
8. Social media
Think early about social media. In what appears to have been a masterstroke, I know of a young new entrant to the sector who invited a handful of industry bloggers to a “hard hat” session at his first site before the restaurant was opened and trialled the food and the cooking process with these incredibly influential people. The relevant bloggers influenced more than 1m Twitter followers and before the restaurant opened, it was on the radar of every foodie in the country.
9. Tap network for experience
To the extent possible, invite some experienced industry types to be part of your concept. Create an advisory board and give them some equity in the business in return for their experience, contacts and credibility. This is an incredibly savvy thing to do and improves your street cred overnight.
10. Don’t bother about dilution, get a ratchet
Finally, don’t get too caught up with giving away too much equity up front. The reality is that the value of owning 100% of a business plan or 20% of a company with a business plan is still worthless. You should not be afraid of giving away equity early on if it gives your business access to the funds it needs to grow and to the people you need to help you to grow it. It’s better to own 30% of a successful business when its sold than owning 90% of a failed business when it’s liquidated. Instead, agree with your investors that if you deliver them 10x returns then regardless of what % shareholding you own, you should be entitled to an additional 10% of value on a sale and if you deliver them 20x returns, you will be entitled to 20% of additional value above that benchmark. This mechanic, known as a ratchet, is a perfect way to compensate a founder for delivering exceptional returns and to continue to incentivise a founder following the early rounds of dilution. Remember, it doesn’t matter how much you own the day before you sell, it only matters what your value entitlement is when you actually sell.
Armed with the above conventional wisdom, good luck and happy hunting.
David Roberts is a partner and head of leisure at International law firm Olswang
